M/S Franchise India Holdings Ltd., Chandigarh—__ v. Assistant Commissioner Of Income Tax,Circle, Chandigarh

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH Sr. No.208CWP173222015Pronounced on: 28thseptember, 2016 M/s Franchise India Holdings Ltd., Chandigarh—__ Petitioner VERSUS Assistant Commissioner of Income Tax,Circle, Chandigarh ..... Respondent Ms.Urvashi Dhugga, Advocate, tor the respondent. >>>>>>> DEEPAK SIBAL J. The present petition has been filed at the instance of theassessee seeking therein quashing of the notice dated 24.10.2014, issuedunder Section 148 of the Income Tax Act, 1961 (for short the “Act’) andorder dated 16.04.2015, whereby the petitioner's objections to the aforesaidnotice were rejected. For the assessment year 2010-11 the petitioner filed its return,declaring therein an income of Rs.89,73,250/-. The return was processedunder Section 143(1) of the Act. The case was selected for scrutiny. On|being asked to produce its records, the assessing officer was informed onbehalf of the petitioner that the same was not available as it had beendestroyed in a fire which took place in the premises of the petitioner on10.05.2011. A First Information Report (FIR) in that regard lodged by the CWP123222015 petitioner with the police was also produced. After noticing the destructionof the record in the fire, the assessing officer perused the profit and lossaccount for the relevant year and finding expenses under certain heads likebusiness, promotions & conveyance expenses, travelling incentives etc. tobe on the higher side when compared to the previous assessment year, madea disallowance of a lump sum amount of Rs.10,00,000/-. On 03.03.2014, audit objections were raised with regard to thepetitioner's assessment to tax for the relevant assessment year. The auditobjections were as under: - “During the course of audit, it has been noticed that the auditor vide para27 of the audit report has been reported that provisions of chapter XVII bhas not been complied with. In the profit and loss account, the assesseedeb%tedf(((OWin)e2peTSes(T)=hiCh TDSpTOV%"%(T"$Teapp(%Cable: - Rs.2,88,01,473.00/- Rs. 54,35,000.00/-Rs. 23,81,740.00/-Rs.2,03, 16,004.80 Total- Rs.5,81,62,260/- No ledger accounts of the above expenses are available on recordto ascertain as to whether the TDS was deducted by the assessee or not?Keeping in view the certificate of the auditor, it seen that TDS was notdeducted by the assessee and therefore the same is liable to be disallowedunder section 40(a)(ia) of the Income Tax Act, 1961. In the balance sheet, the assessee has shown Rs.12,28,313 as TDSexpenses payable. No proof of payment of TDS to the central Govt.account is available on record, therefore, the same are not allowableexpenses u/s 43B of the Income Tax Act, 1961, The above discrepancies resulted into under assessment to the tuneof Rs.5,81,62,260/- involving tax effect of Rs.1,79,73,138/-. Reference: - The annexure to the balance sheet such as security deposits,loan and advances, secured loan, current liabilities are not found availableon record. The AO requested to examine as to whether any loan or advancesor the security deposits are for the business purposes or not?” Thereafter the petitioner was issued a notice dated 24.10.2014 under Section 148 of the Act as to why it may not be re-assessed. The assessing officer forwarded the reasons for the same under cover of a letter dated 06.01.2015. They read as under: - “From the information on record, it is seen that the assessee M/sFranchise India Holidays Limited, # 2504, Sector 22-C, Chandigarh duringthe F.Y. 2009-10 in the profit & loss account has debited the followingexpenses on which TDS provisions are applicable but no TDS has beendeducted by the assessee: - The above amount should have been disallowed as per theprovisions of section 40(a)(ia) and added back to the returned income. Butthe same has not been disallowed.Above omission resulted into under assessment of income ofRs.5,69,34,217/-, Thereafter the petitioner was issued a notice dated 24.10.2014 under Section 148 of the Act as to why it may not be re-assessed. The assessing officer forwarded the reasons for the same under cover of a letter dated 06.01.2015. They read as under: - “From the information on record, it is seen that the assessee M/sFranchise India Holidays Limited, # 2504, Sector 22-C, Chandigarh duringthe F.Y. 2009-10 in the profit & loss account has debited the followingexpenses on which TDS provisions are applicable but no TDS has beendeducted by the assessee: - The above amount should have been disallowed as per theprovisions of section 40(a)(ia) and added back to the returned income. Butthe same has not been disallowed.Above omission resulted into under assessment of income ofRs.5,69,34,217/-, In view of the above, I have reason to believe that the abovementioned amount has escaped assessment because of failure on the partof the assessee to disclose truly & fully all material facts.” After inspecting the record, on 09.03.2015 the petitioner filedits objections to the issuance of the aforesaid notice under Section 148 ofthe Act, which through order dated 16.04.2015 were rejected. It is in thebackground of the above facts that the petitioner through the presentpetition has knocked the doors of this Court for the afore-referred reliets. Mr.Sanjay Bansal, Senior Advocate, appearing on behalf of thepetitioner submitted that on receipt of the impugned notice under Section148 of the Act, in order to respond to the same through an effective reply,the petitioner had sought from the respondents a copy of the audit memoNo.99 in respect of audit conducted on 03.03.2014, annotated report dated11.07.2014 and a copy of the letter dated 04.09.2014. However, thedepartment did not supply the same. The petitioner was only permitted toinspect the record and it is on that basis only that the initial responses to theimpugned notice as also the objections to the same were filed. It was | 4] violation of the principles of the natural justice, It was further submitted that it was only much later on thepetitioner's filing an application under the Right to Information Act, 2005that the respondents supplied to the petitioner all the relevant documents.The documents revealed that on the audit objections dated 03.03.2014, thecomments of the assessing officer had been sought for. The same weregiven through an annotated report dated 11.07.2014 in which the assessingofficer, after considering the audit objections had recommended no furtheraction. Thereafter, through letter dated 04.09.2014, emanating from theoffice of the Commissioner of Income Tax, Chandigarh the assessing officerwas asked to give reasons as to why he recommended no action to be takenin pursuance to the audit objections and it was only after the receipt of theabove letter from the Commissioner that the assessing officer issued theimpugned notice dated 24.10.2014 to the petitioner. | Thus, it was submitted that the impugned re-assessmentproceedings were only on the basis of audit objections on which, on beingasked to comment, the assessing officer had recommended no further actionand, therefore, the matter should have been dropped then and there. Theinitiation of the impugned re-assessment proceedings resulted only on thereceipt by the assessing officer of a diktat from the Commissioner in theform of the afore-referred letter dated 04.09.2014 which vitiated the entireproceedings. It was still further submitted that the initial assessment orderdated 19.12.2012 had been made after perusal of the profit and loss accountwhich included all particulars of the expenses incurred by the petitionerincluding expenses on advertisement, rent etc. and that being so it would be CWP123222015 It was still further submitted that the initial assessment orderdated 19.12.2012 had been made after perusal of the profit and loss accountwhich included all particulars of the expenses incurred by the petitionerincluding expenses on advertisement, rent etc. and that being so it would be CWP123222015 presumed that while assessing the petitioner the assessing officer hadapplied his mind qua all the contents of the profit and loss account. Thus,the impugned re-assessment proceedings, seeking to re-assess the income ofthe petitioner under the same heads, as contained in the profit and lossaccount which was perused earlier, according to learned senior counsel,were only on the basis of a change of opinion of the assessing officer whichwas impermissible in law. Per contra, Ms.Urvashi Dhugga, Advocate, appearing on behaltof the respondent submitted that there was no violation of the principles ofnatural justice as alleged. The petitioner had admittedly been allowed toinspect the relevant record and that all the relevant documents, though at alater stage, had been supplied. No prejudice had been shown by thepetitioner. — The re-assessment proceedings were sought to be justified bysubmitting that though initially when the audit objections were put to theassessing officer, he had not recommended any further action but whenthrough letter dated 04.09.2014, he was requested by the Commissioner, inhis administrative capacity, to give reasons for the same, the assessingofficer wrote to the TDS department and summoned the record pertaining tothe petitioner and only on the receipt and perusal thereof he tormed anindependent opinion that the audit objections had been rightly raised and itis on such satisfaction on his part that the impugned notice dated24.10.2014 under Section 148 of the Act, for initiating re-assessmentproceedings against the petitioner, was issued. Under Section 147 of the Act, if the assessing officer hasreasons to believe that any income which should have been chargeable to tax has escaped assessment, he is well within his rights to initiateproceedings, as prescribed by law, to bring such income to tax. However,the satisfaction to initiate re-assessment proceedings has to be his own andnot based on the diktat of another or based solely on audit objections. Re-assessment proceedings also cannot be initiated merely on a change ofopinion of the assessing officer. If as per the record before him he hadformed an opinion leading to the passing of the assessment order, then hecannot on a re-look of the same record, and based on a change of opinion,review his decision. The opinion of the assessing officer to initiate re-assessment proceedings has to be based on new tangible material. The Apex Court in Indian & Eastern Newspaper Society Vs.Commissioner of Income Tax, |1979| 119 ITR 996 (SC), held that the viewexpressed by an internal audit party of the Income Tax Department is onlyto be considered as information and that to initiate re-assessmentproceedings on the basis thereof the assessing officer has to, afterconsidering the audit objection form his own independent opinion. It wasfurther held therein that the power of the assessing officer to initiate re-assessment proceedings cannot be exercised on account of oversight,inadvertence or mistake on his part while passing the assessment order. In Commissioner of Income Tax, Delhi Vs. Kelvinator ofIndia Ltd., [2010] 320 ITR 561 (SC), while interpreting the words “reasonto believe” in section 147 of the Act, the Apex Court held that the assessingofficer cannot re-open assessments on the basis of mere change of opinion.Making a distinction between the power to review and to re-assess, theApex Court held that the assessing officer had no power to review.However, he had the power to re-assess provided that such re-assessmentShamsher Singh2016.10.05 10:01I attest to the accuracy andauthenticity of this documentChandigarh In Commissioner of Income Tax, Delhi Vs. Kelvinator ofIndia Ltd., [2010] 320 ITR 561 (SC), while interpreting the words “reasonto believe” in section 147 of the Act, the Apex Court held that the assessingofficer cannot re-open assessments on the basis of mere change of opinion.Making a distinction between the power to review and to re-assess, theApex Court held that the assessing officer had no power to review.However, he had the power to re-assess provided that such re-assessmentShamsher Singh2016.10.05 10:01I attest to the accuracy andauthenticity of this documentChandigarh was not a mere change of opinion and that the same is based on sometangible material which comes to his notice after the assessment has beenmade and on the basis whereof he arrives at a conclusion that there has beenescapement of income from assessment. In the case of ICICI Home Finance Co. Ltd. Vs. Assistant!Commissioner of Income Tax |2012] 25 taxmann.com 241 (Bom.), aDivision Bench of the Bombay High Court interpreted Section 147 of the Act, by holding as under: - “6. The power to reopen a completed assessment under Section 147of the Act has been bestowed on the Assessing Officer, if he has reason tobelieve that any income chargeable to tax has escaped assessment for anyassessment year. However, this belief that income has escaped assessmenthas to be the reasonable belief of the Assessing Officer himself and cannotbe an opinion and/or belief of some other authority. In fact, the SupremeCourt in the matter of India Eastern Newspaper Society v. Commissionerof Income Tax, New Delhi, reported in 119 ITR page 996 has held thatwhether an assessment has escaped assessment or not must be determinedby the Assessing Officer himself. The Assessing Officer cannot blindlyfollow the opinion of an audit authority for the purpose of arriving at abelief that income has escaped assessment. In the present facts, it would benoticed that the reasons for which the assessment for the assessment year 20062007 is sought to be reopened by communication dated12.10.2011 are identical to the objection of the audit authority dated29.12.2009. The reasons do not rely upon any tangible material in theaudit report but merely upon an opinion and the existing material alreadyon record. This itself indicates that there was no independent application ofmind by the Assessing Officer before he issued the impugned notice. Onthis ground alone, the assumption ofjurisdictionby the Assessing Officer can be faulted. 7. However, aS submissions were made on other issues also we areexamining them also. It is a settled position in law that where assessmentsought to be reopened is before the expiry of four years from the end of therelevant assessment year, then in such cases the power to reopen anassessment is very wide. However, even though such a power is very wideyet such a power would not justify a review of the assessment orderalready passed. The Supreme Court in the matter of the Commissioner ofIncome Tax v. Kelvinator (India) Ltd, reported in 320 ITR page 561 hasobserved that the power to reassess is conceptually different from a powerto review. The Assessing Officer under the said Act has only power toreassess on fulfillment of certain precondition namely, he must havereason to believe that income has escaped assessment and that there mustbe tangible material to come to the conclusion that there is an escapementof income from assessment. The Apex Court cautioned that in the garb ofreopening an assessment review should not take place. This courtfollowing the Apex Court in the matter of Cartini India Ltd. v. Addl. C.LT.reported in 314 ITR 275 has also held that even where reassessment issought to be done within four years from the end of the relevantassessment year, there must be reason to believe that income has escapedassessment and such reason to believe should not be on account of mere change of opinion. Therefore, where facts have been viewed during theoriginal proceeding and an assessment order has been passed then in suchcases, reopening of an assessment on the same facts without anything morewould be a review and not permitted under the garb of reassessment. Thiswould be a mere change of opinion in the absence of any tangible materialand is not sufficient to assume jurisdiction to issue the impugned notice. Infact, our court in the matter of Idea Cellular Ltd v. Deputy Commissionerof Income tax reported in 301 ITR 407 has held that once all the materialwith regard to particular issue is before the Assessing Officer and hechooses not to deal with the same, it cannot be said that he had not appliedhis mind to all the material before him. Further, as observed by the FullBench of Delhi High Court in the matter of C.I.T. v. Kelvinator of IndiaLtd. Reported in 256 ITR 1, when the entire material is placed before theAssessing Officer at the time of original assessment and he passes anassessment order under Section 143(3) of the Act a presumption can beraised that he applied his mind to all the facts involved in the assessment. To the same effect is a Division Bench judgment of this Courtin “State Bank of Patiala Vs. Commissioner of Income Tax |2015] 375 ITR109. On applying the above settled principles of law to the facts ofthe present case, we are of the opinion that the petitioner deserves no relief.Before the original assessment order dated 19.12.2012 was passed, therelevant record of the assessee had been destroyed in fire. On perusal of theprofit and loss account finding the expenses shown therein, when comparedwith the previous assessment year to be higher, the assessing officerimposed a lump-sum deduction of Rs.10,00,000/-. On 03.03.2014, an auditobjection was raised qua the above assessment which was to the effect thatas required, no TDS had been deducted by the petitioner qua expenses onadvertisement, rent, courier services and event expenses. Thus, as per theprovisions of Section 40(a)(ia) of the Act these expenses were liable to bedisallowed and added back to the assessee's income. On the above objections the comments of the assessing officer were sought who recommended no further action. The Commissionerthrough letter dated 04.09.2014 requested the assessing officer to spell out reasons for not recommending any action on the audit objections. The gistof the letter dated 04.09.2014, reads as under “Kindly refer to your report bearing no.1921 dated 11.7.2014 onthe subject mentioned above.2 The audit objection has been raised by the IAP as the Auditors inthe report pointed out that provisions of section XVIIB has not beencomplied with. Thus, the following expenses are liable to be disallowedand added back u/s 40(a)(ia) of the I.T. Act: To AdvertisementRs.2,88,01,473/-To rentRs. 54,35,000/-To courler expensesRs. 23,81,740/-To event expensesRs.2,03,16,004/- onIn this regard, you are requested to send your comments whetherthe objection is acceptable or not. If not, reasons thereof and if yes, youlare requested to kindly propose the action suggested to be takenE (Emphasis supplied). reasons for not recommending any action on the audit objections. The gistof the letter dated 04.09.2014, reads as under “Kindly refer to your report bearing no.1921 dated 11.7.2014 onthe subject mentioned above.2 The audit objection has been raised by the IAP as the Auditors inthe report pointed out that provisions of section XVIIB has not beencomplied with. Thus, the following expenses are liable to be disallowedand added back u/s 40(a)(ia) of the I.T. Act: To AdvertisementRs.2,88,01,473/-To rentRs. 54,35,000/-To courler expensesRs. 23,81,740/-To event expensesRs.2,03,16,004/- onIn this regard, you are requested to send your comments whetherthe objection is acceptable or not. If not, reasons thereof and if yes, youlare requested to kindly propose the action suggested to be takenE (Emphasis supplied). The petitioner terms the above letter as a diktat by theCommissioner to the assessing officer leading to the initiation of re-assessment proceedings. We do not agree. The Commissioner by this lettermerely sought reasons from the assessing officer. He did not direct him toinitiate proceedings for re-assessment. The assessing officer could havefurnished reasons and reiterated his decision not to reopen the assessment.It is also important to note an aspect regarding the annotated reply. Theaudit objections were specifically with respect to the issue of TDS. Theassessing officer's response was Silent on this issue except for stating that hewas informed that the record had been destroyed. He had admittedly notseen any other record pertaining to the issue. The Commissioner as aisuperior officer, in his administrative capacity was well within his rights toask his subordinate to back his recommendation with reasons when theSame were found lacking, especially when such recommendation was madecontrary to the audit objections which contained both reasons and } 10] provisions of law. After the receipt of the above quoted letter, the assessingofficer apparently now acting in a more responsible manner through acommunication dated 23.09.2014 addressed to the TDS wing of thedepartment sought the record pertaining to the deposit of TDS by thepetitioner with regard to the expenses on which the petitioner was supposedto deduct TDS at the time of release of payments. The record was suppliedby the TDS wing to the assessing officer through letter dated 17.10.2014 onthe examination of which the assessing officer found that the petitioner had,in fact, not deducted TDS as required by law on the expenses incurred by ittowards advertisement, rent, courier services and event expenses. Thisinformation which would come under “tangible material” was not beforehim at the time when the original assessment was made and on the basiswhereof, on recording of reasons, which were later supplied to thepetitioner, the re-assessment proceedings were initiated. It may be notedthat at the time of framing of the original assessment, the assessing officerhad sought record from the petitioner which was not produced on theeround that the same had been destroyed in a fire which took place in thepremises of the petitioner. This fact would have also contributed towardsthe escapement of the above income from tax. Mr.Bansal placed strong reliance upon the audit report, theprofit and loss account and the assessment order under Section 143(3). Theassessment order states that the assessing officer perused the profit and lossaccount. This, however, was in relation to items unconnected with thoserelating to TDS. Mr. Bansal however, submits that it must be presumed thatthe assessing officer had perused the entire profit and loss account. The profit and loss account refers to payments which required tax to be deductedat source. He also relied upon item 27 of the audit report which reads asunder: - Mr.Bansal placed strong reliance upon the audit report, theprofit and loss account and the assessment order under Section 143(3). Theassessment order states that the assessing officer perused the profit and lossaccount. This, however, was in relation to items unconnected with thoserelating to TDS. Mr. Bansal however, submits that it must be presumed thatthe assessing officer had perused the entire profit and loss account. The profit and loss account refers to payments which required tax to be deductedat source. He also relied upon item 27 of the audit report which reads asunder: - D27.(a)Whether the assessee has complied withthe provisions of Chapter XVII-Bregarding deduction of tax at source andregarding the payment thereof to thecredit of the Central Government.the provisions of Chapter XVII-Bregarding deduction of tax at source andregarding the payment thereof to thecredit of the Central Government. NO |Yes/No] (b)If the provisions of Chapter XVII-BNA.have not been complied with, pleasegive the following details*, namelyhave not been complied with, pleasegive the following details*, namely C%FTax deductible and not deducted at all C%%FShortfall on account of lesser deductionthan required to be deductedthan required to be deducted C%%%FTax deducted late C%<FTax deducted but not paid to the creditot the Central GovernmentPlease give the details of cases coveredin (1) to (iv) above.”ot the Central GovernmentPlease give the details of cases coveredin (1) to (iv) above.” Mr.Bansal, therefore, submits that it must be presumed that theassessing officer formed the opinion that tax was not to be deducted atSOUTCE. These references in fact support the case for reopening theassessment. In answer to the query at item 27(a) the petitioner rightly says“NO”. But in answer to the query at item 27(b) the petitioner say “N.A.”1.e. not applicable. This was patently incorrect and misleading. We willassume that it was the petitioner's bonafide impression that TDS was notapplicable. The fact remains, however, that the answer was incorrect. Anassessee who makes an incorrect statement in the main body of the auditreport cannot turn around and say that he had stated the facts in an annexure from which the assessing officer could have discovered the incorrect this statement to be correct even with respect to the payment mentioned inthe annexure for instance on the basis that the payee had deposited the sameand that therefore, the question of the assessee paying the same did notarise. The plea of violation of principles of natural justice raised onbehalf of the petitioner, needs to be considered only to be rejected. It is theadmitted position that the petitioner was permitted to inspect the relevantrecord before he filed his objections to the initiation of re-assessmentproceedings. Even otherwise, the entire record, as asked for by thepetitioner, was made available under the Right to Information Act, 2005.The petitioner has also not shown any prejudice on this ground. In view of the above, the writ petition being without any merit1S ordered to be dismissed. 1 S.J. VAZIFDAR |CHIBEE JUSTICE | DEEPAK SIBAL |JUDGE OS[th]September, 2016 shamsher Whether reasoned/speakingYes / NoWhether reportableYes / No